Estate of Cervin v. Commissioner

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT
_______________

m 98-60503
_______________

ESTATE OF ALTO B. CERVIN, DECEASED;
NITA-CAROL CERVIN MISKOVITCH and BENNETT W. CERVIN, Executors,

Petitioners-Appellants,

VERSUS

COMMISSIONER OF INTERNAL REVENUE,

Respondent-Appellee.

_________________________

Appeal from the Decision of the United States Tax Court
_________________________
January 24, 2000

Before HIGGINBOTHAM and SMITH, fees above the $75 per hour limit imposed by
Circuit Judges, and DUPLANTIER, the Internal Revenue Code. Because we agree
District Judge.* with the Tax Court that no “special factor”
existed to justify deviating from the statutorily-
JERRY E. SMITH, Circuit Judge: imposed cap, we affirm.

As a “prevailing party” in a previous tax I.
deficiency dispute with the Internal Revenue Alto Cervin (the “decedent”) had two chil-
Service (the “IRS,” the “government,” or the dren, Bennett Cervin and Nita-Carol Cervin
“Commissioner”), the taxpayer appeals the Miskovitch, who were the heirs and co-
Tax Court’s denial of an award of attorneys’ executors of the estate.1 In response to the

* 1
District Judge of the Eastern District of We refer to the estate and children collectively
Louisiana, sitting by designation. (continued...)
federal tax return filed by the estate, the IRS recover its reasonable litigation costs, and we
issued a notice of deficiency that, in pertinent remanded for the Tax Court to determine the
part, involved (1) an adjustment of the value of correct tax due and the amount of attorneys’
the decedent’s fractional interests in each of fees and other litigation costs to be recovered.
four real properties (The estate had valued See Estate of Cervin v. Commissioner, 111
each property at a 25% discount for the F.3d 1252 (5th Cir. 1997) (“Cervin I”).
decedent’s fractional interest.) and (2) the
inclusion in the estate of 100% of the value of On remand, the Tax Court recalculated the
three life insurance policies on the decedent’s amount of tax due and found that all the
life that had been purchased during his attorney time resulting in fees sought by the
marriage to his predeceased spouse. In petitioners should be allowed but that no
response to the notice of deficiency, “special factor” existed to justify the award of
petitioners filed a petition for redetermination fees in excess of the statutory $75 cap. See
in the Tax Court. T.C. Memo 1998-176 (May 12, 1998) at 7.
Thus, the Tax Court awarded $88,963.56 in
In an earlier opinion, the Tax Court had fees and costs, rather than the $224,063.55
decided that the gross estate included 100% of claimed by petitioners.
the proceeds from the life insurance policies
and that a 20% discount applied in valuing the II.
real properties. See Estate of Cervin v. Section 7430 of the Internal Revenue Code,
Commissioner, T.C.M. (CCH) 1115 (1994). 26 U.S.C. § 7430, states that a “prevailing par-
The estate then moved for an award of its ty” can recover “reasonable litigation costs,”
litigation costs pursuant to 26 U.S.C. § 7430 including reasonable fees paid to attorneys, but
on the ground that it had substantially that “such fees shall not be in excess of $75
prevailed with respect to both the amount in per hour unless the court determines that an
controversy and as to the most significant set increase in the cost of living or a special fac-
of issues. The Tax Court denied the motion. tor, such as the limited availability of qualified
attorneys for such proceeding, justifies a high-
The estate appealed on the insurance and er rate” (emphasis added). See § 7430(C)(1)-
litigation costs issues, asserting that only 50% (b)(iii). In support of their contention that
of the life insurance proceeds should be they are entitled to the full amount of fees they
included in the gross estate and claiming were charged, petitioners assert two distinct
entitlement to an award of reasonable litigation theories that they allege establish a “special
costs under § 7430. We reversed, holding that factor.”
petitioners had substantially prevailed with
respect to the amount in controversy and that First, petitioners argue that their attorney’s
the Commissioner’s position with respect to expertise in tax law, combined with his
the insurance proceeds and the property expertise in Texas community property and
valuation was “not substantially justified.” insurance laws, constitutes a special factor,
Thus, we held that the estate was entitled to because it was necessary to the litigation.
Second, they assert, in the alternative, that the
Commissioner’s “untenable” litigation
(...continued) positions in the Tax Court deficiency
as “petitioners.”

2
proceeding and in Cervin I should also be In Underwood, 487 U.S. at 571-72, the
considered special factors. In support of this Court interpreted the “limited availability” spe-
second argument, petitioners point out that the cial factor language in the EAJA and explained
position the Commissioner took in the that
proposed deficiency was contrary to well-
established Texas law, that the position was in [i]f the “limited availability of qualified
violation of the IRS’s own regulation and its attorneys for the proceedings involved”
revenue ruling, and that it was contrary to meant merely that lawyers skilled and
Estate of Cavanaugh v. Commissioner, experienced enough to try the case are
51 F.3d 597 (5th Cir. 1995). in short supply, it would effectively
eliminate the $75 cap . . . . We think it
We review for abuse of discretion the Tax refers to attorneys having some
Court’s determination that no special factor distinctive knowledge or specialized skill
existed. See Pierce v. Underwood, 487 U.S. needful for the litigation in questionSSas
552, 571 (1988); Powers v. Commissioner, opposed to an extraordinary level of the
43 F.3d 172, 179 (5th Cir. 1995). In general lawyerly knowledge and ability
determining the meaning of the “special useful in all litigation. Examples of the
factor” exception to the statutory cap, this former would be an identifiable practice
court has looked to cases interpreting the speciality such as patent law, or
identically worded provision of the Equal knowledge of foreign law or language.
Access to Justice Act (“EAJA”), 28 U.S.C.
§ 2412(d). See, e.g., Powers, 43 F.3d at 183. As a result of Underwood, this court adopted
a two-pronged test to determine whether lim-
A. ited availability and specialization can
Petitioners assert that their attorney’s spe- constitute a “special factor.” Under that test,
cial expertise in tax law and Texas community a limited-availability special factor exists if
property and insurance laws constitutes a spe- “(1) the number of competent attorneys who
cial factor because that expertise was handle cases in the specialized field is so
necessary to the litigation. As further support limited that individuals who have possibly valid
for their claim, they point to the limited claims are unable to secure representation; and
availability of attorneys with the required (2) . . . by increasing the fee, the availability of
specialization and to the fact that an increased lawyers for these cases will actually be
award of fees would help alleviate such increased.” Perales v. Casillas, 950 F.2d
shortage. In response, the Commissioner 1066, 1078 (5th Cir. 1992). Thus, petitioners
urges that a speciality in tax law can never be correctly observe that the special factor inquiry
sufficient to meet the requirements of the involves consideration of three criteria:
“special factor” analysis and that petitioners (1) whether the attorneys had a specialized
must show, instead, that their attorney skill that was necessary to the litigation;
possessed some unique “nonlegal or technical” (2) whether the number of attorneys with such
abilities that contributed to the limited skill was so limited that litigants with
availability of attorneys capable of handling the potentially valid claims were unable to obtain
litigation. counsel; and (3) whether an increased fee
award would have reduced this shortage.

3
 We further delineated the “special factor” Id. at 1078 (emphasis added).
analysis in several cases since Underwood.
First, in Bode v. United States, 919 F.2d 1044 This articulation of the “limited availability”
(5th Cir. 1990), we held that “counsel’s standard illustrates this court’s view that this is
expertise in tax law, in and of itself, is not a a very narrow exception. And under this test,
special factor warranting a fee award in excess the skills of petitioners’ attorney do not qualify
of $75 per hour under section 7430.” Id. at as a special factor.
1050. We did note in dictum, however, that
the attorney’s “[s]pecial legal expertise about Petitioners do not point to any “nonlegal or
the quarterhorse industry may well have technical abilities” possessed by their attorney,
qualified as a special factor,” but that the and none was necessary. Rather, petitioners’
taxpayers had failed to establish such attorney apparently possessed skill in several
attorney’s limited availability in that case. See legal areas, such as tax law and Texas
id. at 1051. community property and insurance laws, that
proved useful, even necessary, for the suc-
Next, in Perales, we focused on the cessful litigation of this case. But under the
language of Underwood that provided ex- Perales standard, that is not enough.
amples of the types of expertise that could
qualify as a special factor under the “limited Petitioners urge that the standard
availability” inquiry. Specifically, we noted articulated in Perales is mere dictum and that
“that patent law appropriately represents a the holding that increased fees were not
specialized area because of the specific available actually was premised on the fact that
technical training required of members of the the district court had not found a limited
Patent Bar,” including “scientific and technical availability of qualified attorneys to handle im-
qualifications, which make them uniquely migration cases. See id. at 1079. On this
qualified to render a valuable service,” and the point, petitioners are correct that the
fact that “the Patent and Trademark Office discussion of patent law and of “nonlegal or
administers a separate examination for technical abilities” was not outcome-
admission to the Patent Bar, further restricting determinative.
the pool of potential attorneys.” Perales, 950
F.2d at 1078 & n.15. We concluded that Three years later, however, we reconfirmed
the approach of Perales in Powers, noting that
we believe that the Supreme Court in Perales had “explained that a ‘special factor’
Underwood intended to distinguish non- under the EAJA means nonlegal or technical
legal or technical abilities possessed by, abilities possessed by, for example, patent law-
for example, patent lawyers and experts yers and experts in foreign law, as distin-
in foreign law, from other types of guished from other types of substantive spe-
substantive specializations currently cializations currently proliferating within the
proliferating within the profession. In a profession.” Id. at 183. We also said it was
sense, every attorney practicing within a not enough that “Powers needed the services
narrow field could claim specialized of a tax attorney as well as an attorney with
knowledge. ‘an extraordinary level of general lawyerly
knowledge.’” Id.

4
 Again, petitioners seek to distinguish presented expert-witness testimony that
Powers by arguing that its endorsement of the established all three of the required criteria,
Perales standard was not necessary to the and because the Commissioner did not
holding. Petitioners are correct that the court challenge this evidence, the Tax Court’s
noted that, unlike the estate in the instant case, finding that no special factor exists violated the
“Powers submitted no evidence that there was holding of Powell v. Commissioner, 891 F.2d
a shortage of lawyers who could have handled 1167, 1173 (5th Cir. 1990). Specifically, they
this case, nor did he show that the field of argue that the Tax Court abused its discretion
available lawyers would be enlarged by by disregarding the only evidence on the
increasing the fee award.” Id. record regarding an enhanced award.
Essentially this is an argument, based on
But, at a minimum, Bode, Perales, and Powell and Bode, that by not challenging
Powers evince this court’s assessment that the petitioners’ evidence, the government has
Supreme Court intended its listing of the waived its ability to challenge a conclusion that
patent and foreign-language lawyer examples higher fees are warranted.
to be narrow exceptions, and these cases
demonstrate the judicial conclusion that Petitioners misread those cases and imper-
“Congress thought that $75 an hour was missibly expand the limited waiver contemplat-
generally quite enough public reimbursement ed by either. For example, in Bode the court
for lawyers’ fees, whatever the local or held that “because the United States did not
national market might be.” Underwood, 487 controvert the expert’s opinion on the
U.S. at 572. Thus, to the extent that Perales unavailability of qualified counsel for this type
and Powers left any room for doubt about of case, the United States . . . has waived this
whether the “special factor” analysis requires factual issue and cannot now contend that the
“nonlegal or technical abilities,” we now taxpayers could have obtained qualified legal
conclude that it does so require. counsel for less.” Bode, 919 F.2d at 1051
(emphasis added) (citing, inter alia, Powell,
This conclusion is bolstered by the fact that 891 F.2d at 1173).
the award of any attorneys’ fees can happen
only pursuant to a waiver of sovereign Even if the Commissioner has waived the
immunity. As a result, such waiver must be right to challenge a factual conclusion that
strictly construed. See Fenton v. Federal Ins. there were a limited number of attorneys avail-
Adm’r, 633 F.2d 1119, 1122 (5th Cir. Jan. able in the local or national legal market, this
1981) (“[A]s a limited waiver of sovereign does nothing to help petitioners with the fact
immunity, [EAJA] is to be strictly ob- that they have not established the first of their
served.”).2 three suggested criteriaSSi.e., they have not
shown the requisite “specialty” as that criteria
Petitioners also assert that because they is understood in Perales and Powers.
Notwithstanding any shortage in the number of
tax attorneys who also have specialized
2
Accord Kenlin Indus., Inc. v. United States, knowledge of Texas community property or
927 F.2d 782, 786 (4th Cir. 1991) (noting that insurance law, the necessity of engaging such
§ 7430 “must be strictly construed in favor of the attorneys can never be a “special factor,” be-
Government”).

5
cause the attorney’s skills are not “nonlegal or
technical abilities.” See Perales, 950 F.2d
at 1078; Powers, 43 F.3d at 183. Thus, in
light of this circuit’s consistently narrow
interpretation of what can constitute a
“specialty and limited availability” of qualified
attorneys under the special factor analysis, and
specifically in light of Perales and Powers, pe-
titioners have failed to show entitlement to
enhanced attorneys’ fees.

B. There, the court confronted the question
In addition to their argument that their at- whether the government’s general posture in
torney was sufficiently specialized and unique the litigation could be a special factor under
to warrant a “special factor,” petitioners assert the statute and under Underwood.
that the Commissioner’s “untenable” litigation
positions unreasonably complicated and In analyzing Underwood, the Jean court
prolonged this litigation, causing petitioners opined that the Supreme Court “gives little
significant legal expenses and hardship. As a guidance as to what can constitute a special
result, petitioners urge us to adopt a new
“special factor,” not previously recognized by
this court, that would allow for an increase in (...continued)
fees where the government’s behavior was a special factor existed, and this court was
particularly egregious. unwilling to call such determination an abuse of
discretion. Moreover, we recognized that
In support of this argument, petitioners “increases above [the $75] rate, although
urge us to “follow those courts that have indi- permissible, should be awarded sparingly and only
cated that a flagrantly improper litigation posi- after particularized and careful analysis of the
tion may constitute a special factor under individual facts of the case.” Id. at 1082.
§ 7430,” and they rely most notably on Jean v.
Nelson, 863 F.2d 759 (11th Cir. 1988), aff’d Two of the other cases cited by petitioners can
on other grounds, 496 U.S. 154 (1990).3 also be distinguished in that they involved
discretion to the district courts’ determinations that
special factors existed. See Oklahoma Aerotron-
ics, Inc. v. United States, 943 F.2d 1344, 1350
3
Petitioners advance a number of additional (D.C. Cir. 1991); Pollgreen v. Morris, 911 F.2d
cases that they suggest support recognition of such 527, 537-38 (11th Cir. 1990). Another case,
a special factor. For example, they cite Baker v. In re Moulton, 195 B.R. 954, 959 (Bankr. M.D.
Bowen, 839 F.2d 1075 (5th Cir. 1988), which Fla. 1996), relies entirely on Jean for its
states, in dictum, that the government’s delay in the conclusion that “inexcusable and egregious
payment of attorneys’ fees may be a special factor conduct” can constitute a special factor. Thus,
within the meaning of the EAJA. Baker, however, only Jean engages in any analysis of the issue
involved a decision by the district court that such presented in this case, and it is enough for us to
(continued...) consider at length only that decision.

6
factor,” and it concluded that, therefore, “the of this canon of construction is improper. Ac-
Court appears to have recognized that judicial cording to the legislative history the petitioners
construction of the ‘special factor’ term is like- cite, the award of attorneys’ fees is intended
ly to evolve with time.” Jean, 863 F.2d “to reduce the deterrents and disparity
at 776. The Jean court then remanded to al- [between Government and private-party re-
low the district court to “approach this sources] by entitling certain prevailing parties
question anew.” Id. Before it did so, to recover attorney’s fees,” thereby creating an
however, the court noted in a footnote that “if additional incentive for private parties to “de-
the Government in this case advanced fend[] against unreasonable Government
litigation for any improper purpose such as action.” See H.R. Rep. No. 96-1418, 96th
harassment, unnecessary delay or increase in Cong., 2d Sess. (1980), reprinted in 1980
plaintiffs’ expense, then consistent with U.S.C.C.A.N. 4726, 4974.
[Underwood], its action warrants the
imposition of a special factor.” Id. at 776 n.13. Assuming, arguendo, that we should use
It is on this footnote that petitioners base the legislative history to inform our construction
bulk of their argument. of the statute, the purposes the petitioners ad-
vance are in no way inconsistent with the
In response, the Commissioner argues first Commissioner’s interpretation. Nothing in the
that “well-settled” principles of statutory con- cited passages supports an award in excess of
struction counsel that the phrase “such as” is the $75 per hour statutory rate. Instead, the
not a phrase of strict limitation, but is a phrase more plausible interpretation of the statute, in
of general similitude indicating that there are light of these underlying purposes, is that Con-
includable other matters of the same kind that gress intended the $75 rate to be sufficient to
are not specifically enumerated by the provide private parties with incentives to “de-
standard. The Commissioner urges that in fend against unreasonable Government
interpreting the “special factor” term found in action.” Petitioners have done nothing to
§ 7430(c)(1)(B)(iii), we should be mindful of demonstrate why the IRS’s “indefensible”
the instructive language that followsSS“such as litigation positions would increase the hourly
the limited availability of qualified attorneys rate, as opposed to a mere increase in the
for such proceeding”SSand the Commissioner number of hours required to litigate the case.4
concludes that awards of higher fees based on
the IRS’s litigation positions are not of the
4
“same kind” or “general similitude” as are cri- While petitioners respond that the specific liti-
teria that relate to the abilities of taxpayer’s gation positions taken by the Commissioner here
counsel. required them to hire an attorney with specialities
in tax law and Texas community property and in-
surance laws, such an argument is a thinly veiled
Petitioners counter this first argument only
attempt to relitigate the contention that we
by noting that the ejusdem generis canon as- previously rejectedSSi.e., that petitioners’ attorney
serted by the Commissioner is not always con- was sufficiently specialized and of limited
trolling or conclusive and that here we should availability to qualify for a special factor.
look to the legislative history of the EAJA (be- Moreover, petitioners’ arguments are
cause legislative history on the instant statute contradictory. It is likely that where the
is sparse) to see that the Commissioner’s use government’s position is truly so contrary to well-
(continued...)

7
 Seen in this light, then, the Commissioner’s We note, however, that the Commis-
position is correct that imposition of a special sioner’s conduct has already been taken
factor in these circumstances essentially would into account by the Tax Court’s
amount to an impermissible award of punitive determination that his positions in the
damages, contrary to the statute and to 1980 and 1982 Notices was [sic] “not
principles of sovereign immunity. Instructive substantially justified.” The justification,
is another court’s rejection of a taxpayer’s or lack thereof, for the commissioner’s
argument that the Commissioner’s improper position is a threshold question that
behavior in issuing a notice of deficiency must be first examined to determine
should be considered a special factor: whether a litigant even has a case for
fees under § 7430. To also qualify this
query as a “special factor” in the
calculation of the amount of the fee
award is inappropriate; otherwise a
“special factors” analysis would amount
to a vehicle for assessing punitive
damagesSSa notion that receives no
support in the structure or language of
the statute.

Cassuto v. Commissioner, 936 F.2d 736, 744
(2d Cir. 1991).

Petitioners criticize this logic by urging that
they do not advocate that “lack of substantial
justification” should be a special factor, but,
instead, that only in the limited circumstances
where the government’s position is also
“untenable” or “unable to be defended” does
the conduct qualify as a special factor. They
also argue that the award of fees would be
compensatory, not punitive, because it is based
on actual fees incurred. Moreover, they assert
that the award of increased fees is not punitive
in nature, because it is not designed to punish
and deter improper conduct, but, rather, is
(...continued) based on equitable principles that will
established law (as suggested by petitioners here),
encourage taxpayers to stand up for their
the quality of lawyers needed to defend against rights in the face of egregious government
such a position should be at least marginally lower. action and improper conduct.
And at any rate, the government’s alleged
protraction and delay in this case only serve to But once again, petitioners’ argument sup-
increase the ultimate cost it will have to pay in the ports the award only of some fees, and in this
event of any award of fees.

8
case only of the statutorily allowed maximum
of $75. As we have said, petitioners have not
demonstrated why a higher hourly rate is nec-
essary to combat the government’s allegedly
egregious conduct. While the calculation of
damages would be compensatory in nature, the
enhancement of fees above the statutory rate
can be justified only under punitive damages
principles.5 And the Commissioner correctly
points out that § 7430 in no way waives
sovereign immunity for punitive damages.

Therefore, in light of the Commissioner’s
superior construction of § 7430 and of the pu-
nitive nature of the remedy suggested by peti-
tioners, we conclude that the government’s lit-
igation position cannot be a “special factor”
warranting an increase above the statutorily al-
lowed $75 per hour. This is so regardless of
how “untenable” that position might be. While
this holding is in conflict with Jean, it is
consistent with Cassuto and is correct as a
matter of statutory interpretation and in light
of the principle of sovereign immunity.

AFFIRMED.

5
For these reasons, we decline petitioners’ invi-
tation to adopt the analysis employed in Jean.
There, the court employed similarly-flawed
reasoning that “improper purpose,” “harassment,
unnecessary delay, or increase in the plaintiffs’
expense” should warrant imposition of a special
factor and increased attorneys’ fees, rather than
merely justifying the award of statutorily-allowed
attorneys’ fees for all the additional time necessary
to defend against the government’s positions.

9